The trade finance crunch

FOR lack of access to credit, nearly $1 trillion worth of trade is missing from the world economy.

That was the point made by a recent opinion piece written for the Inter Press Service news agency by Roberto Azevêdo, the sixth and current director-general of the World Trade Organization (WTO): The lack of access to flexible and user-friendly means of financing trade deals can and does have a “very, very significant impact” on countries’ trading potential.

Azevêdo explained that up to 80 percent of global trade is supported by some sort of financing or credit insurance, but in developing economies a lack of capacity in the banking system, excessively restrictive credit standards, and lack of access to the international financial system are choking trade.

The African Development Bank in a recent study estimated the market for trade finance on that continent currently at between $300 billion and $350 billion. A further $110 billion to $120 billion in business is being missed, however, largely due to structural problems – small balance sheets at issuing banks, insufficient dollar liquidity, insufficient limits granted by endorsing banks to local issuing banks, and a lack of creditworthiness among many businesses.

A similar study conducted by the Asian Development Bank revealed the scope of the problem is even bigger in Asia, with unmet demand for trade finance approaching $800 billion. The Asian study also found that rejection rates of credit applications exceed 50 percent for small and medium enterprises (versus about 7 percent for multinationals), and that once rejected, about two-thirds of potential credit transactions simply vanish due to companies’ deciding not to pursue them.

Although Azevêdo based his assessment that we should be alarmed by all of this on the annoyingly outdated benchmark of “pre-financial crisis levels” (The financial crisis happened seven years ago, let it go already), his comments do encourage us to take a closer look at the state of trade finance.

The situation in the Philippines is fortunately not as dire as in some other countries, at least in some respects. In terms of capacity and financial system sophistication, there are a number of large banks that offer a wide range of trade finance and related products and services, and the banking system overall is generally regarded as well regulated and adequately capitalized.

Unfortunately, making full use of those positive attributes seems to be a struggle. Credit standards are not uniform from bank to bank, nor are they uniformly applied, and as the ADB Asia study indicated, tend to deviate more from what is considered an acceptable norm the smaller the prospective borrower is. There is also a disparity in process efficiency and general customer service between banks and even among offices of individual banks, according to some business owners I spoke to; a few were satisfied with their experience, but even they described the procedures as being time-consuming. Access is also a problem, particularly for businesses in rural areas; not all banks capable of handling trade financing have conveniently-located offices, and if they do, it is not a certainty those branches will be staffed by someone sufficiently experienced and adept at managing those transactions.

The bank—at least the ones I contacted—are fully aware of those issues, as is the BSP, which has reportedly just finished a study focusing on customer service and process issues in the banking industry. The problem, as pointed out by a BDO spokesperson who declined to be named (which is too bad, as he was probably the most enthusiastic person I’ve talked to in a month), is those pesky free market forces. Banks expand into areas where there is a comprehensive guarantee of demand, and that is, of course, the classic catch-22—if there are no trade finance customers in a particular area, there is no justification from a business perspective to offer those services, while in the meantime, the local businesses are not expanding into trade precisely because financing is unavailable or or difficult to obtain.

The WTO’s Azevêdo is not much help; his assessment concluded that “lack of development of the financial sector” was the basic problem, and that everyone should get together and work on that, somehow.

To be fair to the secretary-general, it is an extremely complicated problem, and it is also a problem that ‘policy’ will do little to solve. Again, we can consider ourselves fortunate that the problem is much less acute in the Philippines than in some other places; nevertheless, the problem still exists. The solution to it—which Azevêdo seemed to be trying to avoid saying in so many words—is for the financial sector to take a more development-minded approach. In practical terms, that means relaxing risk limits, something which the archconservative Philippine banking sector is loathe to do.

With even greater trade competition expected from the launch of the Asean Economic Community, the Philippines needs to maximize its export potential, and most of that lies in the small and medium business sectors. By not opening up more trade opportunities to those businesses, Philippine banks are missing an opportunity themselves, and instead acting as a brake on the larger economy.

1 Comment

Thanks again, Mr. Ben Kritz, for giving this piece of advice to us Filipinos, but unfortunately will go in one ear and out the other of those who should, the people of the PCOS created President BS Aquino.